This should not be a surprise to labor scholars, lawyers as well as to readers to this blog. In Schramm v. Commissioner, No. 8938-09 (T.C. Aug. 30, 2011), a professor who taught an Internet-based course for a university attempted to claim deductions on Schedule C as an independent contractor. The Tax Court rejected his argument and applied the common law right to control test which examined the following factors:

The Tax Court recently held that a $175,000 payment received by a plaintiff "as damages for her
emotional distress due to depression and other claims, not as wages or
back pay," paid out by her employer to settle her employment
discrimination and retaliation claim, was includable as income under
Internal Revenue Code Sec. 104(a)(2). Damages
(other than punitive damages) received on account of personal physical
injuries or physical sickness may generally be excluded from gross
income. However, the payment here was made as damages for emotional
distress due to depression attributable to a nonphysical injury that
is, alleged gender discrimination and unlawful retaliation in
employment. As a matter of law, damages resulting from such nonphysical
injuries are not excluded. (Wells v Commissioner, TC Memo 2010-5, January 5, 2010).

United States v Memorial Sloan-Kettering Cancer Center,( 2d Cir. March 25, 2009) illustrates that employee status is not just important for labor and employment law purposes-there are tax consequences as well.
Here, the 2d Circuit held that the lower court erred in ruling that medical residents are
categorically ineligible for the student exemption from taxes under the
Federal Insurance Contributions Act (FICA) as a matter of law. The district court found the FICA
language regarding medical residents was ambiguous and, relying upon
its reading of the legislative history, concluded the interns were not
"students" for FICA purposes and held the defendant hospitals owed
payroll taxes on monies paid to the interns. Significantly, however, the 2d disagreed. The court
found the FICA language was not remotely ambiguous. "The statute
expressly defines which individuals fall within the scope of the
student exception: students who are 'enrolled and regularly attending
classes.'" Because the interns fit this description, they were
potentially eligible for the exemption, thus the court remanded the
case for the lower court to undertake a particularized inquiry into
whether the interns here qualified for the exemption.

Univ. of Chicago v. U.S., ___F.3d___(7th Cir. Sept. 23, 2008) is a little noticed tax law case. Students are exempt for FICA taxes. Query, whether medical residents are students? The court does not set forth a blanket rule and instead holds that this determination is to be made on a case by case basis. As the court explains:

For the reasons we have already stated, the statute unambiguously doesnot categorically exclude medical residents from eligibilityfor the student exception. To the extent the statute isambiguous, the regulation calls for a case-specific test foreligibility that focuses on the character of the employingorganization as a school, college, or university, and itsrelationship with the employee claiming student status.The regulation reflects a permissible construction of thestatute (the government does not argue otherwise) and isplainly applicable here, the government’s argument aboutthe repeal of the intern exception notwithstanding.Accordingly, we join the Eleventh Circuit in holding thatthe student exception, § 3121(b)(10), is not per se inapplicableto medical residents as a matter of law; rather, a caseby-case analysis is required to determine whether medicalresidents qualify for the statutory exemption from FICAtaxation. Mount Sinai Med. Ctr., 486 F.3d at 1253; see alsoMinnesota v. Apfel, 151 F.3d 742, 748 (8th Cir. 1998) (reachinga similar conclusion regarding medical residents at aNo. 07-1838 13state hospital, construing a student exception containedin an agreement between the State of Minnesota and theCommissioner of Social Security pursuant to 42 U.S.C.§ 418(a)(1)).

As those of you who may know me are well aware, I try to stay as far away-very far- from tax law as I can. So, why did this case catch my eye? Because the same issue is litigated in labor law. Are medicial residents employees under the NLRA, for example. The current answer is yes, but the case is several years old. Cases like this 7th Circuit decision may provide guidance to labor courts in making similar determinations.

The Risk of Using Independent Contractors is an interesting May 15, 2008 New York Law Journal article which discusses the risks in classifying individuals as independent contractors verses employees. As this article point out, misclassification can raise employment law as well as tax law issues. Recently, both New York and New Jersey have taken steps to address worker misclassification. Senator Obama has also introduced legislation on the federal level to address this problem As the article states:

[M]any states, including New York, embarked on their own independent worker misclassification initiatives in 2007. Former Governor Eliot Spitzer signed an Executive Order in September 2007 establishing the Joint Enforcement Task Force on Employee Misclassification. Members of the task force include the heads of the New York state departments of Labor, Taxation and Workers' Compensation as well as the New York Attorney General. The departments have been charged with sharing information among themselves about employers suspected of improperly classifying employees as independent contractors, increasing awareness of the harms inflicted by illegal worker misclassifications, creating hotlines for the public (which can be used by competitors) and referring cases to prosecuting authorities as appropriate.

The task force issued its first report on Feb. 1, 2008, and called for far-reaching proposals including legislation that would extend individual liability for worker misclassifications to corporate officers, shareholders, members of LLCs and LLPs, and corporate successors and affiliated entities.

Legislative Initiatives

In 2007, the New Jersey State Legislature passed, and Governor Jon S. Corzine signed into law, the Construction Industry Independent Contractor Act. This law is the most aggressive law in the country governing hiring practices involving the use of independent contractors. It is based on a belief by New Jersey legislators that employers in the construction industry commonly engage in unchecked misclassifications of employees as independent contractors.

Two bills have been introduced in New York that are similar to the independent contractor legislation in New Jersey: New York Assembly Bill A06643 and its companion New York Senate bill S04925.

At the federal level, Senator Barack Obama (D-Ill.) has introduced S.2044, the Independent Contractor Proper Classification Act. If enacted, this legislation would limit the availability of the "safe harbor" provisions in the Revenue Act of 1978,1 permit workers to petition the IRS for a determination of their status as an independent contractor or employee, and mandate that employers post notices to employees and independent contractors informing them of their right to challenge their classification as an independent contractor. The legislation is being considered by the Senate Finance Committee.

The November 5, 2007 Law.com reports in a story entitled "3rd Circuit Finds Retirement Packages for Tenured Professors Are Taxable" on a divided 3rd Circuit decision concerning the taxability of an early retirement package given to professors in exhange for them giving up tenure. The majority held that such payments were a taxable event-at least for FICA tax purposes. The dissent did not believe that these payments were akin to wages because tenure is something different. As the article states:

Because tenure is a form of compensation for past services to the university, payments offered as a substitute for tenure are compensation and therefore taxable as wages," 3rd Circuit Judge Julio M. Fuentes wrote in the 24-page opinion in University of Pittsburgh v. United States.

But 3rd Circuit Chief Judge Anthony J. Scirica dissented, saying he would have upheld a lower court's ruling that awarded a refund of more than $2 million to the university.

"Although the matter is not free from doubt, I would hold the payments were not wages because they were given primarily in exchange for the faculty members' relinquishment of tenure, which is a property interest in continued employment," Scirica wrote.

Gee, I never thought I would be writing about a tax case, but here I go.

Quarto v. Adams, ___N.J. Super. ___(N.J. App. Div. August 9, 2007), is an important decision with respect to gay rights and civil unions.

New Jersey has a Civil Union Act, NJSA 37:1-28 to 36 which was enacted in response to the N.J. Supreme Court decision in Lewis v. Harris, 188 N.J. 415 (2006) on December 21, 2006. The court held that petitioners could file a joint state tax return with respect to the 2007 tax year, but not with respect to the 2006 tax year. The court reasoned that the Division of Taxation was entitled to a reasonable transition period to conform its forms and procedures to the constitutional and legislative principles announced in the above case and statute.

As you may expect, this decision is lengthly and should be consulted if additional information is desired.

In Fleece on Earth v. Department of Employment and Training, ___A.2d___(Vt. May 30, 2007), the Vermont Supreme Court held that knitters and sewers who worked at home for a small business and were paid by the piece were employees and not independent contractors. Therefore, the employer was obligated to pay unemployment insurance taxes for these workers.

Vermont has a statute defining who an employee is which is similar to the common law right to control test, but considered broader. Therefore, this case may be of limited use in other jurisdictions. However, the court did survey decisions from other states concerning the treatment of home workers.

I expect that the status of home workers will arise in many different areas of employment law as more and more workers choose to work at home.

In a case of first impression the 11th Circuit, in U.S. v. Mount Sinai Medical Center of Florida, ___F. 3d ___, 2007 WL 1452156 (11th Cir. 2007), rejects the government's position that medical residents are categorically ineligible for the student exemption from FICA taxation found in 26 U.S.C. Sec. 3121(b)(10). Instead, the court holds that a case by case determination must be made to determine if medical residents enrolled in graduate medicial education programs qualify for exemption by examining whether the purported employer qualifies as a "school, college, or university" and whether the residents qualify as "students."

While the court does not decide whether medicial residents are employees, it remands the case back to the district court who will have to join in the debate with respect to the status of students that has been going on for some time in labor and employment law. See, Boston Medical Center, 330 NLRB 152 (1999)(medical residents are employees under NLRA). But See, Brown University 342 NLRB 483 (2004)(holding that graduate students are not employees under NLRA); contra, Cuddeback v. Florida Board of Education, 381 F. 3d 1230 (11th Cir. 2004)(graduate students are employees under Title VII).

This is surely a case tax and labor law attorneys and professors should keep an eye on.